Is an Afghan Revival Possible?

by Vaishali Basu Sharma - 12 January, 2021, 12:00 1830 Views 0 Comment

This is the first in a two part series on the Afghan Economy

Intra-Afghan peace talks, focused on securing a ceasefire agreement have been resumed after nearly a month.Cautiously backed by regionalgovernments thereappears to be optimism for bringing peace to Afghanistan. However, a real revival of the Afghan state will depend on the ability of the leaders to qualitatively restore the state of its economy. Unless the focus is on the development of infrastructure and restoring the confidence of investors, long-lasting revival of the Afghan state is not possible. For meaningful peace to sustain and future as a sovereign, democratic nation, any forthcoming government in Afghanistan must strive to enable new growth drivers.

What plagues the Afghan economy?

A complex range of domestic and external reasons in the past four decades have led to the decay of the Afghan state. “Home of baksheesh (bribery)” there are numerous factors that exasperate the development ideas proposed by outsiders to drag the Afghan nation out of its inertness, corruption and status as a violent, extremism-ridden state.

Billions of dollars were poured into the country as investments, international aid, and remittances from Afghan expatriates after the Western Coalition forces landed in late 2001 following the 9/11 terrorist attack. This amount was approximately the same as Afghanistan’s GDP and has been tough to maintain since the forces’ withdrawals began in 2014. Apart from the money spent by the American CIA, since 2001, the United States (U.S.) Defense Department, State Department and U.S. Agency for International Development (USAID) have spent or appropriated between $934 billion and $978 billion, for so-called “nation-building” effort in Afghanistan. This relentless pouring of cash into Afghanistan led to rampant corruption. The Washington Post’s report – “The Afghanistan Papers: A secret history of the war, at war with the truth” (released in December 2019) revealed the sheer callousness of Western intervention, not only in terms of its lack of strategic vision but headless handling of the Afghan economy, failure to reign in the opium cultivation, and patronage to kleptocracy.

Envisaging the future of a realm as multifaceted as Afghanistan is obviously a fraught exercise. Afghanistan’s economy is caught in the nexus between military interventions, violent insurgency, deteriorating security conditions, weak governance, fragile democracy, and widespread corruption. Despite thisadverseclimate Afghanistan’s economy has shown considerable resilience and strength in withstanding political and economic transition. In fact,landlocked and vulnerable to natural disasters, Afghanistan’s economy had performed better than the comparator countries in terms of broad macro-economic indicators. Afghanistan’s GDP growth exceeded expectations in 2018, at 2.7%, up from an initial forecast of 2.3%.

Any analysis of the Afghan economy must account for the decades of conflict which the country has endured preventing it from accumulating the advantages of economic diversification. The disadvantagedcommercial environment, worsened by weak rule of law, under-education, lack of skilled training, undeveloped financial sectors reduces the incentives to invest in manufacturing. It also limits the workers’ capacity to expand their productivity, both in terms of quantity and quality of their products.A realistic assessment of the Afghan business environment must reflect the dynamic pace of change and progress set against a sequence of fundamental realities.

Agriculture is the mainstay of the Afghan economy

Like other sectors agriculture in Afghanistan also faced widespread destruction over the last thirty years due to war and political variability. Agriculture is now on the way to recovery, mainly through international aid, and continues to be the main source of income for many households. The agriculture sector’s share in overall employment in Afghanistan is 60% and accounts for about 23% of GDP in 2018.

For much of the rural population, the opium poppy economy is an indispensable source of basic livelihoods and human security.If the illegal productions of poppy were measured, growth would be much higher: the industry represents 90% of worldwide production and generates nearly US $1.5 billion in yearly revenues for the country.The GDP of Afghanistan including opium is US$ 20.3 billion and excluding opium approximately US$ 19.7 billion.

While it is a given that Afghanistan needs to reduce its dependence on opium production, which has extremely damaging effects on the country’s governance, security, political dynamics, and economy. However, and in view of Afghanistan’s weak economy, prioritizing drug control actions, to engineer a sharp reduction in opium poppy cultivation, would be damaging to the economy and to the incomes of many rural households. Moreover, imprudentcounternarcotic actions, such as large-scale eradication or aerial chemical spraying, would be counterproductive and couldlead to more support for the Taliban. Prohibitions on opium cultivation are possible but in areas that have optimal facilities like reliable irrigation water, road connections, and a modicum of security and government presence for the cultivation of alternate profitable crops.

Dry fruits constitute an important export item from Afghanistan, with India ($220M) and Pakistan ($199M) being main destinations. Afghanistan’s agricultural products particularly almonds, pomegranates, pistachios, raisins, and apricots have earned a global reputation for excellence. Afghanistan is now re-establishing its place on the international market. Investment in research, extension and irrigation infrastructure is key to transforming the agricultural sector in Afghanistan.

Absence of a basic financial structure

Afghanistan’s road network is in poor condition, air freight is still limited and costly, with few exceptions. Being sandwiched between Pakistan and Iran, causes delays and extra transport expenses. Standard financial products such as commercial loans and export financing are unavailable. The tax regime remains unwieldy and taxcompliance is truncated. There has been some strengthening of public finances with improved revenue collection.

Foreign Direct Investment in Afghanistan

Political violence, weak regulations regarding property protection, a substantial lack of skilled workforce, under-developed financial markets and insufficient infrastructure limit the country’s potential for attracting foreign investors. If one looks at the trend of FDI flows to Afghanistan from 2001 to 2016, lots of volatility can be observed. There appears to be a direct correlation between American/foreign security presence and FDI inflows to Afghanistan. Post-war reconstruction of Afghanistan, the intervention of NATO armed forces and associated development projects paved the way for remarkable flows of Foreign Direct Investment (FDI) which reached its peak at USD 271 million in 2005. A huge amount of money was invested in Afghanistan from 2003 to 2010 by both local and foreign investors in key sectors, including telecommunication, construction, manufacturing. FDI investment decreased in 2013 because of factors such as the global financial crisis and the gradual withdraw of foreign forces from Afghanistan.

The Afghan government has been initiating policies and various incentives to attract FDI to the country. Afghan law guarantees foreign companies the same investment opportunities as domestic enterprises, and official support for open markets and private sector participation is restated in the Afghanistan National Development Strategy (ANDS). There are no sector restrictions regarding foreign investment; however, any investment above USD 3 million requires the approval of the High Commission on Investment (HCI). The law guarantees national treatment for foreign investors and allows them to lease land up to 50 years (foreign land ownership is not allowed). Furthermore, companies can be wholly foreign-owned.

China is emerging as one of Afghanistan’s biggest investors. For instance, in 2007 a Chinese firm took a $3 billion, 30-year lease for the Aynak copper mine in Afghanistan, while the two countries established a railway link in September 2016, allowing freight to travel from far eastern China to the Afghani rail port of Hairatan. India and China both have repeatedly asserted their desire to combine their efforts in Afghanistan as far as developmental work is concerned.

Vaishali Basu Sharma
Author is an analyst on Strategic and Economic Affairs. She has worked as a Consultant with the National Security Council Secretariat (NSCS) for nearly a decade. She tweets at @basu_vaishali

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